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Efficiency and productivity in the Indian unorganized manufacturing sector: did reforms matter?

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Abstract

This paper analyzes total factor productivity growth of the unorganized manufacturing sector in India using several rounds of the large scale national sample survey state level data for 15 major Indian states for the period 1978–1979 to 2000–2001. Data envelopment analysis is used to compute Malmquist total factor productivity index and its components. The impact of economic reforms on efficiency and productivity is examined. Evidence suggests that total factor productivity registered a positive growth during the period in the country as a whole. Most states in the country witnessed higher total factor productivity growth in the post 1990s reforms period than in the pre-reforms period. Decomposition of the Malmquist productivity index shows that improvement in technical efficiency rather than technical progress had contributed to the observed acceleration in the growth rate. Econometric analysis of the determinants of total factor productivity growth demonstrates that ownership, literacy, farm growth and infrastructure availability significantly influence total factor productivity growth in the sector.

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Notes

  1. The states are Kerala, Tamil Nadu, Andhra Pradesh, Karnataka, Maharashtra, Gujarat, Madhya Pradesh, Orissa, Punjab, Rajasthan, Uttar Pradesh, West Bengal and Bihar. For the purpose of comparison, some of the newly formed states have been merged with their parent states such as Uttaranchal with Uttar Pradesh, Jharkhand with Bihar and Chattisgarh with Madhya Pradesh.

  2. It is a general practice in the literature to name the period after the introduction of New Industrial Policy (NIP) as post-reforms period. The present study prefers to call it as reforms period since reforms are an ongoing process.

  3. For estimation, we have used DEAP 2.1, a program for data envelopment analysis developed by Coelli (1996).

  4. The NSDP figures for the unorganized manufacturing sector of Indian states were obtained from the report on Domestic Products of States of India: 1960–1961 to 2000–2001 (EPWRF 2003). The values of NSDP for the years 1980–1981 to 1996–1997 are expressed in 1980–1981 prices and for the years 1993–1994 to 2001–2002 are expressed in 1993–1994 prices. These are converted into a common base period, 1993–1994 using the splicing method.

  5. If he/she works for more than half of the period of normal working hours of the enterprise on a fairly regular basis, he/she is referred to as a full-time worker. Alternatively, a part-time worker is who works for less than half of the normal working hours of the enterprise on a fairly regular basis. Note that two part-time workers in an enterprise will be counted as 2 and not 1.

  6. Herfindahl index is used as a measure of concentration. It is in the form ∑s i 2, where s is the share of the i th state in total value added in the country. The index takes values in the range of 0 to 1. A value of 0 indicates zero concentration and a value of 1 indicates maximum concentration. For a detailed review on the generalized index of diversification see Gollop and Monahan (1991).

  7. For instance, a Malmquist index of 1.25 (which signals a productivity gain) could have an efficiency change component less than one (say, 0.5) and a technical change component greater than 1 (say, 2.5).

  8. Since we have also included Pre-TFPG as a variable to capture the convergence across states over time, we considered only the time period from 1984–1985 to 2000–2001 and TFPG for the previous sub-period enters as a variable in the right hand side.

  9. Appendix-A discusses the details regarding the data sources on the explanatory variables used in the analysis.

  10. Onder et al. (2003) and Margono and Sharma (2006) relied on the public-private ownership classification while Saygili and Taymaz (2001) used the state-mixed-private ownership classification. Pitt and Lee (1981) examined the impact of ownership on technical efficiency by dividing the firms into foreign owned and domestically owned.

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Acknowledgments

An earlier version of this paper was presented at the International Conference on “The Dragon and the Elephant: China and India’s Economic Reforms” organized by IFPRI at Shanghai, China during June 30–July 2, 2006. We thank the conference participants for their comments and suggestions. We have also benefited from the comments of Kunal Sen, Jean Pierrie Poullier and Suresh Babu. Special thanks are due to an anonymous referee for suggestions and comments, which have helped us to improve the paper considerably. We, however, are responsible for any errors that remain.

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Authors and Affiliations

  1. Centre for Multi-Disciplinary Development Research (CMDR), Dharwad, Karnataka, India

    Rajesh Raj Seethamma Natarajan

  2. Department of Humanities and Social Sciences, Indian Institute of Technology Madras, Chennai, 600036, India

    Malathy Duraisamy

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  1. Rajesh Raj Seethamma Natarajan
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Correspondence to Rajesh Raj Seethamma Natarajan.

Appendix A: Major data sources

Appendix A: Major data sources

Domestic product of states of India: 1960–1961 to 2000–2001, Economic and Political Weekly Research Foundation, Mumbai, June 2003.

Handbook of Statistics on Indian Economy, Reserve Bank of India, Mumbai (various issues).

National Account Statistics, 1950–1951 to 2002–2003, Economic and Political Weekly Research Foundation, Mumbai, December 2004.

Surveys of the Unorganized Manufacturing Sector, National Sample Survey Organization, Ministry of Statistics and Programme Implementation, Government of India (various issues).

1.1 Data sources on explanatory variables

Infrastructure data In a recent study, Ghosh and De (2004) presented estimates for PIDI and FIDI for the years 1971–1972, 1981–1982, 1991–1992 and 1997–1998. These estimates were used in the analysis. The estimates for 1981–1982, 1991–1992 and 1997–1998 were used for the periods 1984–1985 to 1989–1990, 1989–1990 to 1994–1995 and 1994–1995 to 2000–2001, respectively.

Adult literacy rate Data on Literacy level as a percentage of age group were drawn from various issues of Educational Statistics published by Human Resources Department, Ministry of Education, New Delhi.

Registered manufacturing growth Estimated from the Annual Survey of Industries in the registered manufacturing sector published by Central Statistical Organization, New Delhi.

Agricultural sector growth Agricultural growth was measured as the rate of change in gross domestic product of the agriculture and allied sectors at constant prices of 1980–1981. The data were taken from the Reserve Bank of India, Handbook of Statistics on Indian Economy (various issues).

Share of OAMEs in total enterprises Calculated from the NSSO surveys on the unorganized manufacturing sector (various issues).

Urban population growth Data were drawn from the report on Economic Reforms and Employment Growth in India published by Town and Country Planning Organization, Ministry of Urban Development, Government of India, New Delhi, 2005.

State-specific factors Classification of states based on investment climate (IC) comes from CII-World Bank (2002). Besely and Burgess (2002) provided the classification based on labour regulation.

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Natarajan, R.R.S., Duraisamy, M. Efficiency and productivity in the Indian unorganized manufacturing sector: did reforms matter?. Int Rev Econ 55, 373–399 (2008). https://doi.org/10.1007/s12232-008-0046-5

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